Learning, Then Operational Control

We now want to talk about some of the learning elements of the Knowledge & Learning module of the Preliminary Specification. Having tight operational control during operations leads to a situation where the chance for learning may seem limited. However, the very temporary nature of the operation should lead to the dynamics of the marketplace providing for further learning opportunities. Quotations are from Professor Richard Langlois’ paper “Transaction Cost Economics in Real Time."

A market form of organization is capable of learning and creating new capabilities, often in a self reinforcing and synergistic way. Marshall describes just such a system when he talks about the benefits of localized industry. (Marshall, 2961, IV .x.3, p. 271) p. 120

In many ways the characteristics of a learning environment are different from that of an environment designed for operational control. Professor Langlois talks about getting everyone on the same wavelength as one of the objectives of operational coordination. And we have done that by unifying everyone around the capabilities in the “Dynamic Capabilities Interface." This by its nature is counter to the needs of a learning organization.

In this sense, the ability of a large organization to coordinate the implementation of an innovation, which is clearly an advantage in some situations, may be a disadvantage in other ways. Coordination means getting everyone on the same wavelength. But the variation that drives an evolutionary learning system depends on people being on different wavelengths - it depends, in effect, on out-breeding. This is something much more difficult to achieve in a large organization than in a disintegrated system. Indeed, as Cohen and Levinthal (1990a, p. 132) point out, an organization experiencing rapid change ought in effect to emulate a market in its ability to expose to the environment a broad range of knowledge gathering 'receptors'. p. 120

So how is it that these two opposing and contradictory objectives are paired together in one module? There are phases of when the team is being put together, understanding what the operation is and learning the capabilities that are going to be deployed. Bringing in the latest field operations staff and equipment to the job. These are the times in which learning is occurring throughout the group. Then the operational control phase begins in which nothing but the execution of the plan is the concern of the group. The learning is over for the period in which this is happening. There is however, a point at the end of the execution in which the group should input the lessons that they learned into the “Lessons Learned Interface."

How would learning proceed in a system of decentralized capabilities? As I have already suggested, progress would take place autonomously within the decentralized stages. There would be no need for integration unless a systemic innovation offering superior performance arrives on the scene. Indeed, as we have seen, fixed task boundaries and standardized connections between stages might make innovation difficult with the existing structure, requiring a kind of creative destruction. (Schumpeter, 1950). p. 121

The “Lessons Learned Interface” is presented to the people who are representatives of the participant producer firms in the Joint Operating Committee. Results are also presented in the Compliance & Governance and Research & Capabilities modules of the producer firms for all of the Joint Operating Committees they participate in. There they can update the specific capabilities in the “Dynamic Capabilities Interface” and members of the governance team can see if there are any systemic errors being made throughout the organization.

Although they are at opposite ends of the innovation scale. Operational control and learning within one module make sense when the feedback from those operations is critical to future operations. Learning is a part of innovation and it must update the capabilities of the firm and Joint Operating Committees in order to build value for the long term.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Defining Tacit and Explicit Knowledge

We now want to discuss how capabilities are viewed by the users of the information in the interfaces of the Knowledge & Learning module of the Preliminary Specification. After all the amount of information contained within a capability listed within the “Dynamic Capability Interface” to conduct a certain operation would be detailed and it would be inefficient to have everyone reading the same text over and over again. That is why we have computers. We also want to discuss the different types of knowledge (tacit and explicit, or formal knowledge) and note the deficiencies in recording tacit knowledge. I’ll be quoting from Professor Richard Langlois’ paper “Transaction Cost Economics in Real Time."

'Routines,' write Nelson and Winter (1982, p. 124), 'are the skills of an organization.' p. 106

When the user is presented with a view of the capabilities within the “Planning & Deployment Interface” they are provided with several different views of the same data. One is the comprehensive view of the capabilities (explicit knowledge) which includes the full extent of the capabilities. Another is just the changes that have been made since the last time the user viewed the document. This can be presented to the user by fading the already viewed text by 50% so that only the new information stands out. Leaving the user to learn just what has changed in the capabilities since the last time they were viewed. There should also be some annotations for the user to learn who authored the changes and when they were authored so that if there are any follow up questions they’ll know who to contact.

The capabilities will include the explicit knowledge of the operation and the necessary information of whom is responsible for the tacit knowledge. Having this information updated by reviewing only the clear text will enable the user to get up to speed on the changes within seconds. Since the capabilities will be the source for all of the people who are working on the operation everyone will be on the “same page” in terms of the most up to date capabilities and the individuals who are responsible for them.

Such tacit knowledge is fundamentally empirical: it is gained through imitation and repetition not through conscious analysis or explicit instruction. This certainly does not mean that humans are incapable of innovation; but it does mean that there are limits to what conscious attention can accomplish. It is only because much of life is a matter of tacit knowledge and unconscious rules that conscious attention can produce as much as it does." p. 106

Getting a handle on these interfaces is of premier importance to the innovative oil and gas producer. This may seem to be an academic exercise for some that will not bear any fruit. However, these are core to the value of the Joint Operating Committee and the producer firm. It is the actions and interactions that are derivative of these capabilities that will determine the success or failure of the innovative oil and gas firm.

In a metaphoric sense, at least, the capabilities or the organization are more than the sum (whatever that means) of the 'skill' of the firm’s physical capital, there is also the matter of organization. How the firm is organized - how the routines of the humans and machines are linked together - is also part of a firm's capabilities. Indeed, 'skills, organization, and technology are intimately intertwined in a functioning routine, and it is difficult to say exactly where one aspect ends and another begins' (Nelson and Winter, 1982, p. 104). p. 106

and

But often - and especially when innovation is involved - the links among firms are of a more complex sort, involving everything from informal swaps of information (von Hippel, 1989) to joint ventures and other formal collaborative arrangements (Mowery, 1989). All firms must rely on the capabilities owned by others, especially to the extent those capabilities are dissimilar to those the firm possesses. p. 108

So what do we have so far in the Knowledge & Learning module. I thought it might be a good time to take a quick review of the situation and the module from the point of view of the Joint Operating Committee. Providing a summary look at the methods of how the information is provided and used by the people who work within the JOC and the service industry, and those that will have access to the various interfaces of the Knowledge & Learning module of the Preliminary Specification.

It should be that each capability that is listed in the “Dynamic Capabilities Interface” be given a serial number that is unique within the entire oil and gas industry. That way when they are presented to the Joint Operating Committee there will be no confusion as to the number of the capability that is selected. This technically isn’t an issue, however, with the interactions between multiple producers in multiple Joint Operating Committees it is probably a necessity.

Recall we have the football analogy that the operational decision is made to employ x capability on the property. Then everyone has access to that capability and are able to review the explicit knowledge that is contained within the document. This includes the engineers and geologists from the various producer firms that participate in the Joint Operating Committee, and the field operations representatives that have been contracted to provide services. Everyone working from the “same page” in terms of expectations in terms of what the operations is going to be.

Once the decision is made to employ x capability, the capability is selected in the “Planning & Deployment Interface” where the people are assigned their roles and responsibilities in the Military Command & Control Metaphor. This will impose a chain of command in how the operation is run and who has what authority over what operation. Additionally the AFE associated with the operation will be included with the “Planning & Deployment Interface” to impose the budgetary control over the operation. Lastly the Job Order system is made available to implement the commands to execute the operation. It is in here, the “Planning & Deployment Interface” where the operational budget, command and control, execution and authorization are planned for and managed. As we have mentioned elsewhere, innovation and free markets are what we are seeking to obtain in the service industry and the greater oil and gas industry. This however does not preclude high levels of tight operational control during the times when it is required.

The People, Ideas & Objects Preliminary Specification moves the innovative oil and gas producer to the “decentralized production model.” Where the ability to shut in marginal production is possible during times of volatile energy prices. The decentralized production model, as we have discussed in other modules, also reduces the operational and overhead costs of the shut in production so that the cost is minimal to the producer firm. It is during the time of low oil and gas prices that the Joint Operating Committee can review the capabilities provided by the participating producers in the “Dynamic Capabilities Interface.” This review will be to determine which capabilities can be deployed that will reduce the JOC’s cost of operating, or enhance the revenues and return the property to production and profitability sooner.

Making operational control, and review & deployment of the participating producers state of the art capabilities some of the key attributes of the Knowledge & Learning module.

We now want to take a quick look at a paper from Professor Richard Langlois entitled “Chandler in a Larger Frame: Markets, Transaction Costs, and Organization Form in History.” In particular we want to focus on the topic of tacit knowledge and how that is handled in the Knowledge & Learning module of the Preliminary Specification. Recall that tacit knowledge can not be captured in the “Dynamic Capabilities Interface." Only explicit knowledge can be captured there. The fact that you can only capture “text book” knowledge is a limitation that all systems must deal with.

The knowledge that is captured in the “Dynamic Capabilities Interface” is very rich and includes the information necessary to undertake the operation from the point of view of all of the people that will be involved. Included in that information is the roles and responsibilities of the individuals who will undertake the command and control of the operation. They are the ones with the tacit knowledge of the operation.

Much knowledge - including, importantly, much knowledge about production - is tacit and can be acquired only through a time-consuming process of learning by doing. Moreover, knowledge about production is often essentially distributed knowledge: that is to say, knowledge that is only mobilized in the context of carrying out a multi-person productive task, that is not possessed by any single agent, and that normally requires some sort of qualitative coordination - for example, through direction and command - for its efficient use. p. 359 

This direction, or command and control, is exercised through the Military Command & Control Metaphor (MCCM), the AFE associated with the operation and the Job Order System of People, Ideas & Objects Preliminary Specification. Having these three tools available allows the tacit knowledge to be deployed in a highly controlled environment. The MCCM enables the multi-person tacit knowledge to be mobilized and coordinated efficiently. The AFE allows control over the budget of the program. And the Job Order System enables execution of the individual orders and commands. The “Dynamic Capability Interface” provides the resource for all the people to determine their role and responsibility, and ensure that everyone is on the same page in terms of the objectives and deliverables of the operation.

In a world of tacit and distributed knowledge - that is, of differential capabilities - having the same blueprints as one competitors is unlikely to translate into having the same costs of production. Generally, in such a world, firms will not confront the same production costs for the same type of productive activity. Moreover, the costs that can make transacting difficult, and may lead to internalization, can go beyond those that arise in the course of safeguarding against opportunism or damping moral hazard through monitoring or incentive contracts. In such a world, economic activity may be afflicted with "dynamic transaction costs," the costs that arise in real time in the process of acquiring and coordinating productive knowledge. Members of one firm may quite literally not understand what another firm wants from them (for example, in supplier contracts) or is offering them (for example, in license contracts). In this setting, the costs of making contacts with potential partners, of educating potential licensees and franchisees, of teaching suppliers what it is one needs from them, and the like become very real factors determining where the boundaries between firms will emerge. pp. 359 - 360 

We should remember that the participants in any operation will be derived from a variety of organizations. They will be as a result of a pooling of the partnership represented by the Joint Operating Committee. And the representative members of the field service industry who are providing services to the operation. All of these people have the tacit knowledge that is necessary for the operation to be completed. It needs to be coordinated and directed in order for it to be made effective. It is with these four tools the “Dynamic Capabilities Interface,” the Military Command & Control Metaphor, the AFE and the Job Order System that tight operational control of any oil and gas operation will be available to the Joint Operating Committee.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Modularity and Interdependency

We have been discussing modularity between the Research & Capabilities and Knowledge & Learning modules of the Preliminary Specification. How the knowledge, skills, experience and ideas flow from the producer firms through to the Joint Operating Committees. From the development of innovative initiatives to operational control. We now want to discuss what is needed from a modularity point of view in order to attain these benefits. Quotes come from Professor Richard Langlois paper “Organizing the Electronic Century."

In organizational and social systems - and perhaps even in mechanical ones as well - it is possible to think of interdependency and interaction among the parts as a matter of information transmission or communication. p. 5

But this flow is also interactive. To start the process, the capabilities that are listed in the “Dynamic Capabilities Interface” are populated by relevant criteria through to the Knowledge & Learning module. However, there are lessons learned by the Joint Operating Committee in the course of the operation. And these lessons are captured in the “Lessons Learned” interface of the Knowledge & Learning module which is also populated to the Compliance & Governance module. Having direct knowledge of the operation updated to the capabilities of the producer firm in the “Dynamic Capabilities Interface” is necessary for further deployment of those capabilities. The two versions of the “Lessons Learned” interface are provided for the two different organizational constructs. One for the producer (Compliance & Governance) and one for the Joint Operating Committee (Knowledge & Learning).

Users of this information are seeking different purposes for this information. Although the environments in which the two modules are operating (Research & Capabilities and Knowledge & Learning) use the data and information in different ways. Research and innovation vs operational control. High levels of interdependency and interaction on the quality and quantity of the data and information contained within these modules exists.

Recently, Baldwin and Clark (1997, p. 86) have drawn on similar ideas from computer science to formulate some general principles of modular systems design. The decomposition of a system into modules, they argue, should involve the partitioning of information into visible design rules and hidden design parameters. The visible design rules (or visible information consists of three parts. p. 7

• An architecture specifies what modules will be part of the system and what their function will be.

• Interfaces describe in detail how the modules will interact, including how they fit together and communicate.

• And standards test a modules conformity to design rules and measure the modules performance relative to other modules.

These visible pieces of information need to be widely shared and communicated. But contrast, the hidden design parameters are encapsulated within the modules, and they need not (indeed, should not) be communicated beyond the boundaries of the module. p. 7

As people work on both ends of the data in these modules. Engineers and geologists within the producer firms developing the capabilities in the “Dynamic Capabilities Interface." And engineers, geologists and service industry representatives in the Joint Operating Committees on the “Lessons Learned” interface. Data and information will be updated and changed from all the participants involved in both the innovation and operational control. Providing the appropriate input and real life involvement and development of ideas and oil and gas reserves. After all, oil lives in the minds of oil men and women.

We now shift gears from a discussion of modularity to dynamic transaction costs. It is through the interactions that are developed in the Research & Capabilities and Knowledge & Learning modules that the capabilities of the producers and the markets will change. These changes will initiate what Professor Richard Langlois calls “dynamic transaction costs.” Included in these costs will be the necessary costs of the software development capability provided by People, Ideas & Objects. Without the ability for the software to change, the organization will remain fixed and stagnate. It is a requirement that the innovative oil and gas industry obtain the dynamic software development capabilities that People, Ideas & Objects is proposing. That way their organizations will remain flexible and change with their needs.

The Joint Operating Committee, using the Knowledge & Learning module will be accessing the capabilities of the participating producers. They will deploy these capabilities in the service industry and develop the land and asset base of the Joint Operating Committee. During the course of its history there will be times where they will not have access to the capabilities they need. The quotes are from Professor Richard Langlois “Transaction Cost Economics in Real Time.”

Over time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost - the cost of transferring the firm's capabilities to the market or vice-verse. These "dynamic" governance costs are the costs of persuading, negotiating and coordinating with, and teaching others. They arise in the face of change, notably technological and organizational innovation. In effect, they are the costs of not having the capabilities you need when you need them. p. 99

Throughout the Preliminary Specification we have chosen to deal with the “dynamic transaction costs” by recording them in an account labeled as such. This will help the producer firm or Joint Operating Committee to identify and begin to control these costs when they are incurred. It is reasonable to assume that in the innovative and change oriented environment that is the future of the oil and gas industry significant “dynamic transaction costs” will be incurred. And that these would fall predominantly on the Joint Operating Committee in the Knowledge & Learning module. As there would be minimal deployment of their own capabilities by the producer for their own account in the Research & Capabilities module. I am implying that the “dynamic transaction costs” will be incurred for the “persuading, negotiating and coordinating with, and teaching others” in order to acquire those capabilities.

The purpose for these “dynamic transaction costs” is of course for economic progress. Recall that through the “Dynamic Capabilities Interface” and the “Planning & Deployment Interface” which includes the AFE, Military Command & Control Metaphor and Job Order are the means in which to coordinate the capabilities available to the Joint Operating Committee. It is this coordination that employs greater divisions of labor and specialization, and improved efficiency of capital that expand the economic output of the Joint Operating Committee, producer, service, and oil and gas industries.

Economic progress, then, is for Marshall a matter of improvements in knowledge and organization as much as a matter of scale economies in the neoclassical sense. We can see this clearly in his 'law of increasing return,' which is distinctly not a law of increasing returns to scale: 'An increase of labour and capital leads generally to improved organization, which increases the efficiency of the work of labour and capital' (Marshall, 1961, IV. xiii,2 p. 318) p. 101

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Separate and Distinct

Throughout the Preliminary Specification we have discussed modularity from the perspective of the different modules of the specification itself. We now want to talk about modularity from the point of view of the Knowledge & Learning module. How it isolates the Joint Operating Committee and focuses on the operations in the field. Yet provides the JOC with the most up to date information regarding capabilities from each of the participating producers. A capable, innovative Joint Operating Committee that is the legal, financial, operational decision making, cultural, communication, strategic and innovation framework of the oil and gas producer.

Within each of the Research & Capabilities modules of the participating producer firms, people are involved in the research and development of the capabilities of their respective firms. They are the ones that are field testing the innovations that the engineers and geologists are coming up with. That is the primary source of the industry innovation. Whether that is through dedicated efforts of an individual producer or through collaborative efforts with others, innovation, as we learned from our review from Professor Giovanni Dosi is through the application of these resources. Once these ideas are proven and developed into usable and valuable technologies and processes then they can be added as capabilities into their “Dynamic Capabilities Interfaces” in the Research & Capabilities modules. There they, depending on the selection of the producers criteria, might be populated to the Joint Operating Committee that is in that zone, or is available for use with that multi-frac technology, and will be available to the members of that JOC for its use.

What we have been able to do with these two modules in the Preliminary Specification is to eliminate the crossover of the two different purposes of the same information. Quotations are from Professor Richard Langlois’ “Modularity in Technology, Organization and Society."

Modularity is a very general set of principles for managing complexity. By breaking up a complex system into discrete pieces - which can then communicate with one another only through standardized interfaces within a standardized architecture - one can eliminate what would otherwise be an unmanageable spaghetti tangle of systemic interconnections. p. 1

The producer firm is involved in the development and research into the improvement of how to better the production and reserves they hold. The Joint Operating Committee is involved in operational execution. These are two separate and unique organizational objectives that are necessary and involve, in some instances, the same people and the same firms. We need to separate these people into groups and provide some distance so that there is the ability to operate these groups as separate and distinct is possible.

What is new is the application of the idea of modularity not only to technological design but also to organizational design. Sanchez and Mahoney (1996) go so far as to assert that modularity in the design of products leads to - or at least ought to lead to modularity in the design of the organizations that produce such products. p. 1

There are more than the modules organizational constructs to guide the nature of the work within the modules. There is also the markets in which they operate. The Research & Capabilities will be an internal and academic focus that will be collaborative in the geological and engineering disciplines. Whereas the Knowledge & Learning will be steeped in the service industry offerings and operational control. These differences also help to differentiate the nature of the work within the two modules.

Why are some (modular) social units governed by the architecture of the organization and some governed by the larger architecture of the market? p. 2

It is necessary for innovation purposes and operational control that the two modules are separated in this fashion. With the flow of information from the Research & Capabilities to the Knowledge & Learning module, and the speed at which electrons flow, the Joint Operating Committee can be assured that they have the most recent field tested capabilities available to them.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Innovation Meets Field Coordination

The energy industry is faced with a number of issues that seem to continue from year to year. One of those issues is the costs associated with any and all field work. We have heard a variety of claims made by the oil and gas companies about the service industry, but no solutions as to how to deal with them outside of the traditional cost controls and budgeting. We will now discuss how the Knowledge & Learning module of the Preliminary Specification provides a solution for the high costs associated with field operations. Quotations are from Professor Richard Langlois “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization.”

We have with the Knowledge & Learning module a number of other tools that are part of the Preliminary Specification. Specifically the Military Command & Control Metaphor (MCCM) that enables a Joint Operating Committee to impose a chain of command over a multi-organizational group of people during the course of one of these field operations. These operations of course will include members of the Joint Operating Committees participating producers as well as the employees and contractors of the service industry representatives. Having them configured in a manner in which the chain of command is recognizable immediately. Secondly there is in the Preliminary Specification the Job Order system that provides a means in which to execute the operational order within the chain of command during the field operation. These two systems provide a tight control over the entire operation. Simply no action is taken without the authorized Job Order being issued.

This tight operational control seems to contradict the free markets that we have been pursuing in the service industry. I disagree. Having tight operational control has nothing to do with free markets, and free markets have nothing to do with tight operational control. They are two separate and distinct “things” that do not affect one another. Recall that the AFE and Job Order are provided through the “Planning & Control Interface” which bring in the capabilities from the “Dynamic Capabilities Interface” that the Joint Operating Committee has decided to implement. These capabilities include the information necessary for the people to conduct the work for the operation to be a success.

[I]t seems to me that we cannot hope to construct an adequate theory of industrial organization and in particular to answer our question about the division of labour between firm and market, unless the elements of organization, knowledge, experience and skills are brought back to the foreground of our vision (Richardson 1972, p. 888).

What we are implying with this level of operational control is that the Joint Operating Committee representatives, the earth scientists and engineers are in complete and total control of the field operation down to the water hauling driver. In a literal sense, yes, but I think you know the extent of the control that is implied with the MCCM and Job Order system. There is a command structure. Everything is documented. This level of coordination is provided as a means to offset the detail necessary for the science basis of the business to take precedence.

As we will argue in more detail below, there are in fact two principal theoretical avenues closed off by a conception of organization as the solution to a problem of incentive alignment. And both have to do with the question of production knowledge. One is the possibility that knowledge about how to produce is imperfect - or, as we would prefer to say, dispersed, bounded, sticky and idiosyncratic. The second is the possibility that knowledge about how to link together one person's (or organization's) productive knowledge with that of another is also imperfect. The first possibility leads us to the issue of capabilities or competencies; the second leads to the issue of qualitative coordination." p. 11

What Professor Langlois is implying here is that the converse of “incentive alignment” is “qualitative coordination." The high costs associated with the service industry to do their job is in order to motivate the people and the capital to work in the industry. If we were able to better coordinate, in the manner that the Knowledge & Learning module suggests, the issues of costs and quality would be mitigated.

A close reading of this passage suggests that Coase's explanation for the emergence of the firm is ultimately a coordination one: the firm is an institution that lowers the costs of qualitative coordination in a world of uncertainty. p. 11

By using the Joint Operating Committee we are eliminating the use of the bureaucracy. However as the previous quote implies the bureaucracy (or firm) lowered the cost of qualitative coordination in a world of uncertainty, albeit poorly in our case, it is therefore necessary that we replicate that coordination in the Joint Operating Committee.

More generally, we are worried that conceptualizing all problems of economic organization as problems of aligning incentives not only misrepresents important phenomena but also hinders understanding other phenomena, such as the role of production costs in determining the boundaries of the firm. As we will argue, in fact, it may well pay off intellectually to pursue a research strategy that is essentially the flip-side of the coin, namely to assume that all incentive problems can be eliminated by assumption and concentrate on coordination (including communication) and production cost issues only.

By coordinating the field operations in the manner that is proposed in the Knowledge & Learning module of the Preliminary Specification we can eliminate the incentive problem and increase the control over the implementation of the science basis of the business. All with maintaining free and open markets for which the innovation in the service industry to develop.

It might seem that with the opportunity to have such strong operational control provided in the Knowledge & Learning module of the Preliminary Specification. That each and every producer will be able to compete equally. That might be the way that some perceive the situation however, the fact is in an innovative environment that may not be the case. We have clarification of these points from Professor Richard Langlois in his paper “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization."

In a world of tacit and distributed knowledge - that is, of differential capabilities - having the same blueprints [or software] as one's competitors is unlikely to translate into having the same costs of production. Generally, in such a world, firms will not confront the same production cost for the same type of productive activity. p. 18

Producers within the same Joint Operating Committee may be pursuing different strategies than their partners in that JOC. The Preliminary Specification enables a producer to pursue the most effective strategy for each property. A producer may have acquired the property while it was in production and therefore have a different cost structure. Or alternatively the producer may have an interest in the infrastructure used to deliver the gas to market whereas the other producers do not. The makeup, the strategies and the costs of each of the producers are unique and not necessarily leading them to make the same decisions based on the same criteria. However, financial gain still drives consensus.

As we noted, when the Joint Operating Committee conducts a field operation using the tools within the Knowledge & Learning module. Coordination of the capabilities is provided through the Military Command & Control Metaphor and the Job Order system. These capabilities are the knowledge, experience, skills and ideas of the people who are part of the producers in the Joint Operating Committee, and the service industry representatives hired to conduct the field operation. All of these capabilities are documented in the “Dynamic Capabilities Interface” and deployed through the “Planning & Deployment Interface."

This in turn, implies that the capabilities may be interpreted as a distinct theory of economic organization. p. 18

Execution is the focus of the operation and the key competitive differentiation of the parties involved. Within the capabilities that have been decided to be implemented by the Joint Operating Committee there may be new and innovative tools and procedures to be implemented. The oil and gas business is based on the science of geology and geophysics and the applied science of engineering. Operational control at this level is a necessity and a competitive advantage. From Professor Langlois’ paper “Modularity in Technology, Organization and Society."

Industrial economists tend to think of competition as occurring between atomic units called "firms." Theorists of organization tend to think about the choice among various kinds of organizational structures - what Langlois and Robertson (1995) call "business institutions.” But few have thought about the choice of business institution as a competitive weapon. p. 1

If one considers how the Knowledge & Learning module enables the producer to implement their capabilities. Calling them a competitive weapon isn’t far from the truth.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

The Objectivity of People, Ideas & Objects

In both the Knowledge & Learning and Research & Capabilities modules producers are benefiting from something that may not be too obvious on the surface. That is the objective nature of the People, Ideas & Objects Preliminary Specification and the fact that it is not affiliated with any one specific producer. That is to say it is not an application that grew out of Exxon Mobil, BP or Shell and was used there first. It will be an application that was independently supported through the Revenue Model and will remain unbiased as to which producers perspective it takes. The same can be said for the Community of Independent Service Providers. This may mean more to some producers than others, however, from an innovation point of view it will also mean a few things.

People, Ideas & Objects is focused on providing the innovative oil and gas producer with ERP systems based on using the Joint Operating Committee as the key organizational construct. By having a software development capability present while working within the Knowledge & Learning module, the innovative producer will be able to deal with the many new possibilities in their business. The software that an organization uses is a “technology paradigm” that the oil and gas industry has to consider. And software puts the industry on a new “trajectory” just as we have discussed here for the earth science and engineering disciplines. Professor Giovanni Dosi notes.

• First, new technological paradigms have continuously brought forward new opportunities for product development and productivity increases. p. 1138
• Secondly “A rather uniform, characteristic of the observed technological trajectories is their wide scope for mechanization, specialization and division of labor within and among plants and industries.” p. 1138

Which speaks to the attributes of software. However, would these technological paradigms and trajectories be available to the producer community if the software was owned and operated by Exxon Mobil or Shell? What motivation would they have in making the changes to the software to accommodate your business? The third party, objective nature of People, Ideas & Objects and the Community of Independent Service Providers is necessary for the software to become amenable to the needs of its user communities. If the producer is to rely on this third paradigm and trajectory as a key advancement in their business, then it must remain open and focused on the needs of the community. Professor Dosi notes.

Similarly, new technological paradigms, directly and indirectly -- via their effects on “old” ones -- generally prevent the establishment of decreasing returns in the search process for innovations. p. 1138

Let me restate this for clarity, the indirect nature of ERP software via its effect on the earth science and engineering disciplines, will generally prevent the establishment of decreasing returns in the search process for innovations.

Review of the Preliminary Specification to this point shows how different it is from any other ERP system. It is designed around the Joint Operating Committee, the innovative oil and gas producer and will include the user community in determining its precise needs. This is the type of application that is needed for the 21st century oil and gas producer. A vision that focuses the people who work within the industry on the activities that people do best. Collaborating, researching, evaluating and deciding. And leaves the computers to do the things that they do the best. A software development capability designed to provide the innovative oil and gas producer with the means to provide all of their ERP software needs.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Deploying Innovations

It is important to recall that innovation is not research. Research is being conducted in the Research & Capabilities module and when the research is proven, added to the "Dynamic Capabilities Interface" which in turn is populated to the Knowledge & Learning module. We have also drawn the football analogy to how the development and execution of capabilities in the producer firm and Joint Operating Committees are similar to the way that football teams plays are developed and executed. We want to use the analogy of the coach who is motivated to win, selects the plays from a long list of possible plays of what the team can execute.

Professor Giovanni Dosi states that profit motivated agents must involve both “the perception of some sort of opportunity and an effective set of incentives.” (p. 1135) Professor Dosi introduces the theory of Schmookler (1966) and asked “are the observed inter-sectoral differences in innovative investment the outcome of different incentive structures, different opportunities or both”? (p. 1135) Schmookler believed in differing degrees of economic activity derived from the same innovate inputs. For the purposes of this discussion the perception of some sort of opportunity is realized through the members of the Joint Operating Committee reviewing the capabilities that are presented to them through the Knowledge & Learning module. The listing of capabilities presented from the various producers that are participants in the Joint Operating Committee would provide a depth of opportunity that was previously unqualified and unquantified. The incentives would be performance based and focused around the possibility of increasing the trajectory of revenue per employee.

We’ve all seen the coach on the sidelines with the list of hundreds of plays that can be called during the game. Selection of the appropriate play will help to move the team towards its goal of winning the game. To be presented with a list of hundreds of opportunities within a Joint Operating Committee has probably been the case for many in the industry. The ability to select and execute them in the manner that the coach is able to, and have them communicated to the team members for execution in the half second that it takes is the rarity. There is no reason for each and every Joint Operating Committee to not have this type of efficiency in the ability to select and execute the capabilities that are made available to them.

As in the Research & Capabilities module, the Knowledge & Learning module has a “Planning & Deployment Interface." Within this interface the user is able to select the capabilities they want to deploy from the "Dynamic Capabilities Interface" and resource it from the Military Command & Control Metaphor. Since the capabilities are listed from various firms in the Joint Operating Committees special considerations may need to be made in terms of the resource requirements. The “capabilities” that are selected are for company x, and available for company x, not necessarily for Joint Operating Committee xyz without the involvement of x. Therefore special arrangements to augment the Joint Operating Committee with resources from company x will most probably be required. From there the execution of the capabilities can take place.

We have drawn the analogy of a football coach who reviews his list of plays, selects one, and calls it for the team to execute, to the “Planning & Deployment Interface” of the Knowledge & Learning module. The ability for a Joint Operating Committee to have this style of communication and understanding of what needs to be conducted, may be necessary in the very near future. With the insatiable demands for energy, and the ever increasing demands of earth science and engineering work needed with each barrel of oil and gas produced, the amount of work required for the JOC will need to be conducted in a highly organized and controlled manner.

Adding to this level of increased work load the Joint Operating Committee is subjected to the real demands of the expanding earth science and engineering frontiers. In addition the field and service industries are going through their own innovative cycles. The problem is that if each Joint Operating Committee is left to deal with each of these issues on their own, then there will be significant time and energy wasted on pursuing “things” that may or may not bear fruit for the property. This is something that needs to be avoided. However, the JOC needs to be deploying the latest state of the art proven technology in the most capable manner.

If we look over the previous discussion regarding the Research & Capabilities and Knowledge & Learning module we can see how these “things” are filtered out and dealt with. The Joint Operating Committee is being provided with the most up to date capabilities from the producer firms that have a financial interest in the property. It is those producers that are expending the research to expand their understanding of the earth science and engineering on behalf of all of their interests in all of their JOC’s. Taking the trips down the blind bunny trails once and only once on behalf of all the JOC’s. Not having each and every JOC discovery the blind bunny trail on their own. Then developing the capability to the level necessary for the inclusion in the "Dynamic Capabilities Interface" where it will be used successfully by all of the JOC’s they have an interest in.

This process helps the Joint Operating Committee to focus on the property. To eliminate the noise of what is going on in the larger oil and gas arena for the moment and deploy the innovations that are known to add value. It is as when the coach calls the play the only concern is to ensure that you execute your part of the play in the manner that it is designed. There may be times back on the practice field to fiddle with some changes, but for now it's time to run the play as it was designed. This is the business of the “Planning & Deployment Interface” in the Knowledge & Learning module.

Professor Giovanni Dosi asserts that much of the innovativeness of a firm is dependent on technology more than science, and is based on several implications. The first implication being the net benefactor of the cumulativeness, tacitness and technological knowledge implies that “innovation and the capabilities for pursuing them are to an extent local and firm specific.” Secondly, the “opportunity for technological advances in any one economic activity can also be expected to, and constrained by, the characteristics of each technological paradigm and its degree of maturity." This is further defined by the technological and scientific capabilities, and “the advances made by suppliers and customers.” (p. 1137)

These implications that Professor Dosi notes are reflected in the processes managed in the Research & Capabilities and Knowledge & Learning modules. The Knowledge & Learning module enabling the Joint Operating Committee to implement the “innovation and the capabilities for pursuing them are to an extent local and firm specific.” With the Research & Capabilities module providing the future with the “opportunity for technological advances in any one economic activity can also be expected to, and constrained by, the characteristics of each technological paradigm and its degree of maturity.” Providing the producer with the best of both worlds.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Deployment of Capabilities vs. Hoarding of Information

It is best that we start this discussion of information and capabilities with a clear definition of what capabilities are. These are some of the definitions that were published earlier in the Research & Capabilities module and are being noted here for clarity purposes in this post. The best definition for these purposes is the following from Professor Richard Langlois.

Although one can find versions of the idea in Smith, Marshall, and elsewhere, the modern discussion of the capabilities of organization probably begins with Edith Penrose (1959), who suggested viewing the firm as a 'pool of resources'. Among the writers who have used and developed this idea are G.B. Richardson (1972), Richard Nelson and Sidney Winter (1982), and David Teece (1980, 1982). To all these authors, the firm is a pool not of tangible but of intangible resources. Capabilities, in the end, are a matter of knowledge. Because of the nature of specialization and the limits to cognition, organizations as well as individuals are limited in what they know how to do effectively. Put the other way, organizations possess a pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities. pp. 105 - 106.

And as a follow on definition I find this next quote helps to bring the clarity we need for this post.

In a metaphoric sense, at least, the capabilities or the organization are more than the sum (whatever that means) of the 'skill' of the firm's physical capital, there is also the matter of organization. How the firm is organized - how the routines of the humans and machines are linked together - is also part of a firm's capabilities. Indeed, 'skills, organization, and technology are intimately intertwined in a functioning routine, and it is difficult to say exactly where one aspect ends and another begins' (Nelson and Winter, 1982, p. 104). p. 106

With respect to information, we have all seen how information or secrets within the industry can travel from one firm to another at a rather rapid pace. No one should be surprised to learn that what they thought was confidential to the firm, has somehow leaked and became well known throughout the industry. It is sometimes more difficult to communicate information through the organization then it is to get information across the industry. The question therefore becomes how is proprietary information, and more importantly these proprietary capabilities that are available within the producer firms, deployed on an as needed basis within the various Joint Operating Committees.

Professor Giovanni Dosi notes that although the free movement of information has occurred in industries for many years, yet has never been easily transferable to other companies within those industries. The ability to replicate a competitive advantage from one company to another is not as easy, and may indeed be not worthwhile doing. Dosi (1988) goes one step further and states, “even with technology license agreements, they do not stand as an all or nothing substitute for in house search.” A firm needs to develop “substantial in-house capacity in order to recognize, evaluate, negotiate and finally adapt the technology potentially available from others.”

Within the Knowledge & Learning module we are operating within the Joint Operating Committee. Populated with the capabilities from each of the participating producers through the Research & Capabilities “Dynamic Capabilities Interface." It may be a concern to some producers that the publication of these capabilities to other producers representatives in the Joint Operating Committee would lead to the leakage of proprietary information or loss of knowledge or capabilities. That may be, however the nature of capabilities are such that they can’t be copied by a simple matter of recording the text. As we have discussed elsewhere, the development of capabilities is the results of research and application of the resources of the firm in a determined and purposeful manner to achieve an outcome. Copying the plans or instructions would not provide you with the means to achieve the objective. What we have to make sure that we don’t lose is the ability to deploy the right information, knowledge or capability at the right time and at the right place. Information’s shelf life expires faster each day. Knowledge, information and capabilities need to be employed and deployed when and where they are needed and required. That is the competitive advantage, deployment of the dynamic capability, not hoarding of information.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Revenue Per Employee in the Joint Operating Committee

Throughout the Preliminary Specification we have used the factor of Revenue Per Employee as a means to determine the innovativeness of producers. It has been provided in a variety of interfaces to make a comparison between producers and determine the changes in performance over time. Particularly valuable are the calculations of the variances of volume, price and number of employees when considered over a period of time and these variances trajectory. Today we want to talk about the publication of the specific Joint Operating Committee calculations of Revenue Per Employee, and particularly the trajectory that the factor is on. How this calculation could affect those that work within the property; and the use of the information contained within the Knowledge & Learning module of the Preliminary Specification.

First of all it is understood that not all people are necessarily assigned to work for one Joint Operating Committee. There are times when people might be assigned to dozens during the course of one month. Calculating the hours worked by the people within the Joint Operating Committee from the different companies is not going to be a difficulty for the People, Ideas & Objects software. With the Military Command & Control Metaphor the time and tasks that each individual will be doing is being recorded for these information purposes. Although most will only work part-time on a JOC, the factor will be converted on a full-time equivalent basis. Calculations of Revenue Per Employee for the property should be straightforward.

In previous discussions, the calculation of a comparison of the factor of revenue per employee from one period of time to the other was raised. These trajectories were the real key in determining where the factors were heading. Was the property accelerating its innovativeness, or decelerating. We also broke down the trajectory into three different types of variances. The volume variance, price variance, and employee # variance. Each of these variances reflecting the reason why the trajectory might have changed. All of these variables should be shown on their own “Revenue Per Employee” interface within the Joint Operating Committee. Each member that is assigned to the property should have access to this page and be able to contribute ideas and suggestions on how to improve the factor. An open collaboration focused on revenue per employee. In addition, this page could have a historical context of many time periods captured in a graphical format. Showing over the past many years how the revenue per employee at that property has performed.

We also learned that revenue per employee reflects the asymmetry of the assets within the industry. That asymmetry would be very apparent in a comparison of Joint Operating Committees. We would see large variances in revenue per employee between Joint Operating Committees. And I am not suggesting that the comparisons are valid, just pointing out that the industry has a large asymmetry in their competitive makeup. The comparison of revenue per employee for the same property over time, I think, will have a significant impact on the people that work for that Joint Operating Committee. That is to say there would be sizeable changes in both Revenue Per Employee and the trajectory it is on.

One certain way to increase the factor of revenue per employee would be to fire all the employees. However, the best way to deal with the factor is described by Professor Giovanni Dosi when he states “In very general terms, technological innovation involves or is the solution to problems.” Dosi goes on to further define this as “In other words, an innovative solution to a certain problem involves “discovery” (of the problem) and “creation” since no general algorithm can be derived from the information about the problems. Solutions to technological problems involve the use of information derived from experience and formal knowledge. It is the specific and un-codified capabilities, or tacit-ness” as Professor Dosi describes “on the part of the inventors who discover the creative solution.”

Members of the Joint Operating Committee would be able to turn to the "Dynamic Capabilities Interface" which contains the capabilities of the producer firms that are part of the partnership. There the people would be able to see what the firms offered in terms of their earth science and engineering problem solving solutions. It may then be realized that applying some formerly unknown capability to the situation in the JOC will yield greater productivity... or something like that.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Learning Through Markets

We continue to discuss learning in the Knowledge & Learning module. We are deep into the Preliminary Specification and within the research that comprises it. It’s difficult to read and assimilate in small pieces such as these blog posts, however, with a little effort you can find the value and I encourage you to review today’s post with that in mind.

It's important to point out the context of what the Joint Operating Committee will be learning. To do that we turn back to the definition of where the boundary of the firm and market is defined. The Joint Operating Committee must rely on the market for a majority of the work that is done in the field. I understand that this depends on the size of the facility and it will vary based on the types of operations and a variety of other conditions. We can all generally agree that a producer will not be conducting their own water hauling. The point being there is a fine line where the market is the optimal point where the JOC is operationally more efficient to rely on the market to provide the product or service. In oil and gas that definition, or market boundary, is usually that the market provides the majority of the work in the field.

In Professor Richard Langlois’ paper “Transaction Cost Economics in Real Time” he notes the following constraints will be imposed on the oil and gas producers in the JOC as a result of their dependence on the market.

The firms learning ability will depend on its internal organization. And the learning ability of the market will depend on technical and instructional factors, as well as on the learning abilities of the firms it comprises, considered both individually and as a system. The remainder of this paper is devoted to considering these two learning systems in slightly more detail. More specifically, it will set out some preliminary generalization about how the level of capabilities in the firm and the market - and the nature of change in those capabilities - effects the boundaries of the firm. pp. 111 - 112

What the contractors know, and what they think they know may be not relevant to your property. We discussed the fact that the general rule is that the operations being conducted are reduced to the understanding of the least experienced individual on the crew. How do we avoid the general rule being applied to any detailed operation? And how do we avoid what are called the motivational and cognitive paradoxes from becoming the “mindset” of the contractors on this or any of the Joint Operating Committees operations?

As background the motivational paradox arises from the production bias. That is, users lack the time to learn new applications due to the overwhelming concern for throughput. Their work is hampered by this lack of learning and consequently productivity suffers. The cognitive paradox has its root in the assimilation bias. People tend to apply what they already know in coping with new situations, and can be bound by the irrelevant and misleading similarities between the old and new situations. This can prevent people from learning and applying new and more effective solutions.

To add an extra layer of complexity to this process. Recall that we have changes that are being made in the marketplace as a result of the gap filling process seen in the Research & Capabilities module. This being an application of the division of labor and specialization process that deals with the overall organization and efficiencies of the industry that will have a direct effect on the makeup of the contractor and the learning processes in this module.

These issues become the concern of those users of the Knowledge & Learning module of the Preliminary Specification. In an innovative oil and gas industry change will be the constant variable that needs the attention of everyone concerned. Highlighting and prioritizing the main concern of the property will become what is commonplace today. And that is the concern. How do we maintain the awareness and attention that is necessary of everyone to learn what is needed?

Within Langlois’ paper I think we see the answer to the problem detailed within this discussion and in the review of Langlois’ definition of Dynamic Transaction Costs.

"F.A. Hayek (1945, p. 523) once wrote that 'economic problems arise always and only in consequence of change.' My argument is the flip-side: as change diminishes, economic problems recede. Specifically, as learning takes place within a stable environment, transaction costs diminish. As Carl Dahlman (1979) points out, all transaction costs are at base information costs. And, with time and learning, contracting parties gain information about one another's behavior. More importantly, the transacting parties will with time develop or hit upon institutional arrangements that mitigate the sources of transaction costs." p. 104

The answer is, there will be large, in comparison to what is incurred today, Dynamic Transaction Costs expended by the Joint Operating Committee through the Knowledge & Learning module of the Preliminary Specification. This is a strategic necessity whose alternative is for the producers to move all of the operations in-house and manage them internally. Not a viable alternative. If we identify what these Dynamic Transaction Costs are in the process of incurring them and record them as such, then we can deal with them and learn from them. That may be the first step in learning what to do with the learning costs in this high change and high cost era of oil and gas.

In the end the choice of whether to use the market or to vertically integrate is a purely academic exercise. In oil and gas the choice to depend on the market is a given and there is little practical application in the alternatives. What our discussion has been about is more to learn from the discussion of how we can establish processes of learning from using the marketplace? In a period of rapid change with high levels of innovation we are going to be stretched in terms of our capabilities, knowledge and capacity to learn. These areas are the focus of the Research & Capabilities and Knowledge & Learning modules. As the business of the oil and gas business is managed through the interfaces of these modules, the People, Ideas & Objects application will need to identify and support the user through these difficult and somewhat costly processes. As noted in Langlois’ paper “Transaction Cost Economics in Real Time”;

How would learning proceed in a system of decentralized capabilities? As I have already suggested, progress would take place autonomously within the decentralized stages. There would be no need for integration unless a systemic innovation offering superior performance arrives on the scene. Indeed, as we have seen, fixed task boundaries and standardized connections between stages might make innovation difficult with the existing structure, requiring a kind of creative destruction. (Schumpeter, 1950). p. 121

and

Ultimately, the costs that lead to vertical integration are the (dynamic) transaction costs of persuading, negotiating with, coordinating among, and teaching outside suppliers in the face of economic change or innovation. (Teece, 1986). pp. 115 - 116

and

But in cases in which systemic coordination is not the issue, the market may turn out to be the superior learning engine because of its ability to generate rapid trial and error learning. p. 124

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Learning in the Knowledge & Learning Module

What is it that the people who work for a Joint Operating Committee know? Where does a person that has just been assigned to the property learn what is important about it in terms of how its run? Where is this history kept, who maintains it, and how is it accessed? We have discussed the knowledge area of the Knowledge & Learning module of the Preliminary Specification, I want to shift the discussion now to the learning area.

Let's first review Professor Langlois’ definition of Dynamic Transaction Costs.

Over time, capabilities change as firms and markets learn, which implies a kind of information or knowledge cost - the cost of transferring the firms capabilities to the market or vice-verse. These "dynamic" governance costs are the costs of persuading, negotiating and coordinating with, and teaching others. They arise in the face of change, notably technological and organizational innovation. In effect, they are the costs of not having the capabilities you need when you need them. p. 99

Our efforts in the learning section of the Knowledge & Learning module must be to reduce the Dynamic Transaction Costs of the Joint Operating Committee. This objective may be contrary to the times that we find ourselves in. Change is the one constant, learning to adapt to that change is critical. Recognizing the high costs associated with Dynamic Transaction Costs therefore has to be handled from a strategic point of view. This will initiate the discussion and begin documenting how the learning section of the module is configured to capture this data and information.

We now turn to a quotation from Professor Sidney Winter in his paper “Deliberate Learning and the Evolution of Dynamic Capabilities” to define some of the risks we face in the changing environment of the innovative oil and gas producer.

In a relatively static environment, a single learning episode may suffice to endow an organization with operating routines that are adequate, or even a source of advantage, for an extended period. Incremental improvements can be accomplished through the tacit accumulation of experience and sporadic acts of creativity. Dynamic capabilities are unnecessary, and if developed may prove too costly to maintain. But in a context where technological, regulatory, and competitive conditions are subject to rapid change, persistence in the same operating routines quickly becomes hazardous. Systematic change efforts are needed to track the environmental change; both superiority and viability will prove transient for an organization that has no dynamic capabilities. Such capabilities must themselves be developed through learning. If change is not only rapid but also unpredictable and variable in direction, dynamic capabilities and even the higher-order learning approaches will themselves need to be updated repeatedly. Failure to do so turns core competencies into core rigidities (Leonard Barton 1992).

We need to strike a fine balance between these two somewhat opposing goals. Strategically control the Dynamic Transaction Costs and maintain an environment of dynamic capability for change and organizational learning.

The first component of the learning module has to include a wiki styled information repository that contains the operational, policy and management of the property. This will be managed by the Security & Access Control module so that only those that are assigned to the property are able to access the wiki. In addition those that are not of senior levels within the property will have limited access to certain areas within the wiki. Within the wiki will be the entire life history of the property in terms of the information that has been collected. Well files, schematics, reports, agreements, etc. Everything and anything, indexed and referenced in electronic fashion. Recall too the Knowledge area contains the “Dynamic Capabilities Interface” of the producer firms affiliated with the JOC.

Another section should be set out for “Lessons Learned” in which to document where decisions were made based on actions or activities that occurred of interest. These have a dramatic influence on everyone in terms of their learning and understanding about the property. These items should also be published to each person in the property as well as being posted in a central location. As with the Research & Capabilities module the ability to act on these items in terms of right clicking on them and generating an AFE, a Work Order, a Purchase Order or any of the other documents in the People, Ideas & Objects application modules should be possible based on the users needs. More will also be discussed about these lessons learned in the Compliance & Governance module.

Again it might be argued or asked, why is the ERP vendor so concerned about the operational concerns of the oil and gas producer? The simple answer is that it's the business of the business of oil and gas that needs to be supported by the ERP system. And that is at the Joint Operating Committee level in the oil and gas business and the People, Ideas & Objects application. It's not just about debits and credits anymore, it's about identifying and supporting the business of the innovative oil and gas producer.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

I Didn't Notice...

That is to say that I didn’t notice that all of the earnings reports for the producers were in. I was waiting for the majority of them to show up through the normal channels, that is the media, nothing was coming through, so I thought I would check a few websites to see if they had reported them already. And they have, almost all of them. Without any fanfare or commentary in the press, the entire industry has released their earnings without a hint of promotion anywhere.

The point of the matter is that we can now update the 2012 earnings summary for the industry. The results of the North American producers and Exxon, Shell, BP and Total’s global earnings are $146 billion. In reviewing the details of each report it would seem that the performance of each company was down a bit from the prior year. And in each case the natural gas business was the cause of the decline in the performance. Therefore it is appropriate to conclude that if the People, Ideas & Objects Preliminary Specification were available to the industry the $67 billion in 2012 opportunity costs would be added to those earnings for a total of $213 billion.

It is our claim that we provide the most profitable means of oil and gas operations. This is through the use of an innovative business model that uses the Joint Operating Committee as the key organizational construct of the innovative and profitable oil and gas producer. By aligning the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the Joint Operating Committee with the compliance and governance frameworks of the hierarchy we provide a speed, innovativeness and accountability in the producer.

We also provide within our business model the ability for producers to shut-in marginal production. Through a variety of interfaces within the eleven module Preliminary Specification is the ability to agree within the Joint Operating Committee to curtail production. This is done without the traditional costs to the producer as the Preliminary Specification employs the decentralized production model as its means of production. That means that all production and overhead costs are suspended in addition to the production. Leaving only the costs of capital uncovered during times of shut-in production. Allowing the reserves to remain for the time when the prices rise and provide a return to the producer. Producing at a loss only adds additional costs that the reserves will have to cover in the future.

For the next few weeks we will be discussing the Knowledge & Learning module and when we have finished that we will return to a discussion of the profitability of the oil and gas producer and the Preliminary Specification. The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Moving on to the Knowledge & Learning Module

The title of the Preliminary Research Report (2004) was “Plurality Should Not Be Assumed Without Necessity." This being of course Occam’s Razor which in its simplest form means - the simplest explanation is most likely the correct one. Very appropriate when we are talking about using the Joint Operating Committee as the key organizational construct of the innovative and profitable oil and gas producer. However, I also noted in the Preliminary Research Report that Occam’s Razor was referenced as

Its not what you know that you do not know that hurts you. It's what you do not know, that you do not know that will. It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to bring about a new order of things. Knoop & Valor (1997).

Imagine we are now in the Joint Operating Committee with full operational decision rights with respect to the course of action to take. Thanks to the work that is done at the producer firms we know what we know from their work in the Research & Capabilities modules. That information and data is populated in the Knowledge area of the Knowledge & Learning module. Now the rubber hits the road sort of speak and the theory comes to practice.

The Knowledge & Learning module shares many similarities to the Research & Capabilities module, and in fact is populated with the information from that module as its base of information. Recall that the objective that we are working to achieve is to move the knowledge to where the decision rights are held. As I noted, the Research & Capabilities module should be organized based on geologic zones. This is so that the information that is pertinent to each zone can be separated into its own “packaging” within the Knowledge & Learning module. Additional ways in which data may be sorted in the Research & Capabilities module might include by geographical location. Where all the vendors who operate within a certain geographical location are referenced only in those regions in the Knowledge & Learning module.

With each Joint Operating Committee being concerned with one or a handful of geologic zones. The focus of the Joint Operating Committee can be limited to just those specific areas. What is particularly different about the Knowledge & Learning module, however, is that the information that is contained within the module is aggregated from multiple producers. Any of the producer participants who have information contained within their Research & Capabilities module will have that data and information for those geologic zones or other criteria populate the Knowledge & Learning module for that Joint Operating Committee.

With the potential to have multiple companies contributions from their Research & Capabilities module. It is important to have the information organized within the Knowledge & Learning modules in a manner that when multiple producers data is merged, use of the data is probable. Therefore the Joint Operating Committee has a menu of operational choices in which to choose in terms of opportunities for the property.

Throughout our discussion of the Research & Capabilities and Knowledge & Learning modules. We have been discussing the earth science and engineering research, developments, innovations and thinking of the oil and gas producer and the Joint Operating Committee. Many of you may be wondering what exactly does an ERP system have to do with these activities? Simply these activities are where the business of the oil and gas business are being conducted. It is imperative that the systems that manage the commercial aspects of the firm support the people and activities that occur in these areas. This discussion will hopefully convince you of this.

The final look and feel of these two modules will ultimately be the result of the user input and their involvement. The point that I am trying to make in this discussion is that these modules are where the business of the oil and gas business are happening. It should be within these modules that the engineer or geologist should never have to leave. If they find an interesting idea within the knowledge area of the Knowledge & Learning module they should have the opportunity to right click their mouse to have a list of options to prepare a Work Order, Prepare a Budget, or Resource a Project. The ultimate list of options would include the supporting activities of a user defined commercially focused ERP system.

Today there are significant financial resources available for innovation. The commodity price increases are an allocation of capital to fuel innovation. The reorganization of a producer to facilitate innovation is the purpose behind the research that People, Ideas & Objects conducted. That research was the basis of the Preliminary Specification of which the Research & Capabilities and Knowledge & Learning modules are part of. These modules are the two key points where innovation occurs. Within these modules there is a flow of ideas from the service and oil & gas industries through to the producer firm, and then that knowledge is sent to the Joint Operating Committee where it is applied and specific learning occurs.

The People, Ideas & Objects application modules are a critical part of how these ideas are aggregated, filtered and parsed. From having a free flowing, post your ideas on an industry wide publication, to generating funding for those ideas, to developing commercial products and services, to enhancing and developing internal capabilities, to focusing the right people on the right knowledge, and enabling them to learn from what is not known. This process is managed through the Research & Capabilities and Knowledge & Learning modules.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Documenting the Transformation Part V

When we look at the pace of the oil and gas producer. And the pace of the bureaucracy. We see a contrast and conflict that we know just can’t survive. How can the oil and gas producer maintain the pace of the marketplace while the internal pace of “things” remains so slow. In a changing, dynamic and innovative oil and gas industry we can only assume that “things” will be even more demanding in terms of the pace in the future. So how can we expect to keep up? I think that in addition to aligning the compliance and governance frameworks with the Joint Operating Committees legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks. We need to also rely on a far greater level of market orientation. And that includes in the traditional administrative areas of the producer firm.

The Preliminary Specification has three marketplace modules, the Petroleum Lease, Resource and Financial Marketplace modules. There are also high levels of market orientation in the Research & Capabilities module. These provide the producer and Joint Operating Committee with the needed exposure to the marketplaces for their reliance on marketplaces to provide the producer with the ability to keep pace in the changing, dynamic and innovative oil and gas industry.

We really have two choices to deal with the situation of how we are going to deal with the activities within the oil and gas producer. One is through internal management and the other is through marketplaces. We can see that the internal management is unable to keep pace. Their bureaucratic ways just can’t keep pace. What was state of the art two years ago, seems like a century ago and is never used. Providing solutions for the problems that are occurring today are an impossibility. No one has the bandwidth to even address where the problems originated. Everyone is so busy “doing” that no one has the time to “think” about what is happening and “how” to deal with this situation. Its literally mayhem and all a person can do is jump in and try to get some aspect of the job done.

We should ask ourselves is this how an industry should operate? I think we need to look at this problem more globally and begin to think of how we divide the work and allocate it in terms of specialization. These are the tools that we should be using. Computers and software are also some of the tools that we should be using to coordinate this work so that it is done more efficiently. Markets are a means, or another tool, in which to have this done. The way that we are organized as an industry, not necessarily as a company, might be a more efficient way to organize ourselves. These are the things we need to begin to consider to think our way through the kind of problems that we are having with the business of the oil and gas business today. Using these advanced tools, instead of breaking down to the individual troubleshooting the solution on their own.

The Preliminary Specification has this higher level of application of these tools inherent in its eleven modules. This is how we provide the industry with the most profitable means of oil and gas operations. How we can prove that the opportunity costs between what is done today and the environment created by the Preliminary Specification is over $65 billion per year. We can’t see the forest for the trees. And on top of that the bureaucracy is fighting to keep their interests above those of all the other stakeholders. This is not a situation that can continue, but it will without the intervention by the investors of the oil and gas industry. It is they who have the most to lose and it is they who have the ability to do something about it. I am therefore calling on them to direct the producer firms to develop the Preliminary Specification and we can begin to resolve these problems.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Documenting the Transformation Part IV

Moving the industry forward from its sleepy bureaucratic ways will be difficult. One could argue that there is more than just the bureaucracy that is against the Preliminary Specification and People, Ideas & Objects. And by that of course they mean the people who make up the industry and what we usually refer to as the user community here. I couldn’t disagree more. Although there will be some of these people, who like the bureaucracy will resist the changes defined in the Preliminary Specification. Most will welcome the changes for a variety of reasons that I’ll detail here.

The first and probably the most obvious reason that the user community will welcome the changes is due to what is called cognitive dissonance. That is to say that when they see the new system defined in the Preliminary Specification and the logic of using the Joint Operating Committee is as compelling as it is. Then they have difficulty going back to using the systems that are in existence today knowing that there are better alternatives. That’s cognitive dissonance. Using the Joint Operating Committee as the key organizational construct is the legal, financial, operational decision making, cultural, communication, innovation and strategic framework of the industry. When we align the compliance and governance framework of the hierarchy with the seven frameworks of the Joint Operating Committee speed, innovation and accountability are the result. It is the natural way to operate in the oil and gas industry.

Another reason that user community accepts the changes in the Preliminary Specification is that it opens up significant opportunities for them in terms of how they do their work. We are rewriting the “what” and “how” of the work in the industry. This could involve them working for a service provider, or even providing them with the opportunity to establish the service provider for the industry. Focusing on a process that services the entire industry as opposed to the one producer they work for now would provide a variety, intensity and diversity in their work. Whether they are an accountant or an administrator they could deal more with the issues associated with the process, expand on the division of labor and specialization and work with People, Ideas & Objects to further enhance the systems.

One of the primary benefits of moving to the Preliminary Specification will be the division of labor between the people and the computers. Computers will be tasked with the mundane and boring tasks that are redundant for people to be involved in today. The people on the other hand will be involved in the higher level tasks. Tasks such as change management, ideas, innovation, issue identification and resolution, collaboration, decision making to name just a few of the obvious things they’ll be doing.

The risk or fear that there will be fewer jobs as a result of the systems use is a constant since the 1960’s. And if not for the systems we would be buried in paper, file cabinets and file clerks for as far as the eye could see. So that is a fear that hasn’t come to be. What does happen is that the productivity of the industry accelerates and uses fewer resources to do more things. And that’s called productivity. So what we should expect is that the resources we have would remain the same, and the productivity of the industry would accelerate without the need to bring on any additional staff.

So when it comes time for the people to make a decision to go with the Preliminary Specification or to stay with the old worn out bureaucracy. I think the decision will be academic and People, Ideas & Objects will win out almost every time.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.